Tuesday, April 12, 2016

1--Andrew Huszar: Confessions of a Quantitative Easer

(Archive) We went on a bond-buying spree that was supposed to help Main Street. Instead, it was a feast for Wall Street

Chairman Ben Bernanke made clear that the Fed's central motivation was to "affect credit conditions for households and businesses": to drive down the cost of credit so that more Americans hurting from the tanking economy could use it to weather the downturn. For this reason, he originally called the initiative "credit easing."...

In its almost 100-year history, the Fed had never bought one mortgage bond...(the) program wasn't helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans (while) Wall Street was pocketing most of the extra cash. ...

Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the U.S. central bank's bond purchases had been an absolute coup for Wall Street. The banks hadn't just benefited from the lower cost of making loans. They'd also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed's QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way....

The Fed keeps buying roughly $85 billion in bonds a month, chronically delaying so much as a minor QE taper. Over five years, its bond purchases have come to more than $4 trillion. Amazingly, in a supposedly free-market nation, QE has become the largest financial-markets intervention by any government in world history.

And the impact? Even by the Fed's sunniest calculations, aggressive QE over five years has generated only a few percentage points of U.S. growth. By contrast, experts outside the Fed, such as Mohammed El Erian at the Pimco investment firm, suggest that the Fed may have created and spent over $4 trillion for a total return of as little as 0.25% of GDP (i.e., a mere $40 billion bump in U.S. economic output). Both of those estimates indicate that QE isn't really working.

Unless you're Wall Street. Having racked up hundreds of billions of dollars in opaque Fed subsidies, U.S. banks have seen their collective stock price triple since March 2009. The biggest ones have only become more of a cartel: 0.2% of them now control more than 70% of the U.S. bank assets.

2--Banks Face Massive New Headache on Oil Loans

3---The Party's over

In the mid-2000s, companies greeted declining profits by taking on debt, a neat way of flattering returns on equity since all the capital being consumed by the business is coming from creditors rather than shareholders. The net debt-to-Ebitda ratio of the S&P 500 peaked in August 2008, less than a month before the bankruptcy of Lehman Brothers sent the global economy into a tailspin.

Financial engineering is what you do when actual engineering -- the real driver of innovation and growth in a business -- has lost traction. Faced with sliding earnings and a mandate to deliver increasing shareholder returns, companies turn to their lawyers and bankers to stave off the inevitability of a business cycle that's on the turn.

With luck, we'll bounce off this low point and look back with complacency on the current returns dip -- which has, to be fair, pipped back up in recent weeks to 12.0391 percent. But analyst estimates of a 9.8 percent drop in profits in the upcoming first-quarter U.S. earnings season, the sharpest fall since 2009, suggest otherwise.

That's worrying. Economic policymakers have been hoping since 2008 that interest rates would be back in normal territory when the next downturn arrived, allowing them to deploy their conventional monetary policy tools to gin up the economy. If this party really is over, more than inversions and share buybacks will be needed to avoid a crashing hangover.

4--Japan's eventual demise, AEP

Japan is heading for a full-blown solvency crisis as the country runs out of local investors and may ultimately be forced to inflate away its debt in a desperate end-game, one of the world’s most influential economists has warned...

The BoJ is  soaking up the entire budget deficit under Governor Haruhiko Kuroda as  he pursues quantitative easing a l’outrance.

The central bank owned 34.5pc of the Japanese government bond market as of February, and this is expected to reach 50pc by 2017...

Once markets begin to suspect that Tokyo is deliberately engineering an escape from its $10 trillion public debt trap by means of an inflationary ‘stealth default’, matters could spin out of control quickly.

5--Is Bernie’s ‘Political Revolution’ the Real Thing or a Pathetic Joke?

Those fighters are not going to go to the mat for a guy who, if he has the nomination stolen away just gives his blessing to a candidate he has rightly described as a craven shill for the nation’s corporate elite, including the criminal elite who run the Wall Street banks, and walks away from the primaries.

6--IMF to meet amid worsening stagnation and rising geo-economic tensions

7--Why Yellen and the Fed Can Never Normalise Interest Rates

US corporate profits have been in decline since the second quarter of 2015.

Globally, 36 corporate bond issues have defaulted so far this year — up from 25 during the same period of 2015.

Economists at JPMorgan Chase put the US economy growth rate for the first quarter at 0.7% — down by over one-third from earlier estimates.

And there is $1.7 trillion in junk bonds outstanding — a trillion more than in 2008. Some of these are sure to default in the months ahead....

The short version of our argument: for the last eight years, the Fed has tried to stimulate the economy with ultra-low interest rates. Business, consumers, and government now almost all depend on credit…and most need ultra-low rates to make ends meet.

Consumers are in better shape, generally, than they were in 2008. But corporations and governments are in worse shape. Raise the cost of funding, and you will push many of them over the edge.

Banks, pension funds, and insurance companies are especially vulnerable. They’re now stocked up with low-yield government bonds. Should interest rates rise, those bonds will go down in price.

In other words, raising rates will provoke the very calamity the Fed was trying to avoid: the bankruptcy of the financial sector

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